EDITORIAL: Integration of Tokyo Stock Exchange and Osaka Securities Exchange

At a time when competition is intensifying on a global scale, we have entered an age in which stock exchanges also need to integrate to survive.

Tokyo Stock Exchange Group Inc. and Osaka Securities Exchange Co. have started moves toward a possible merger. According to sources, they aim to realize the goal by 2012.

Backed by rapid advances in financial and investment technology and globalization, exchanges around the world are being swept by waves of realignment. If Japan is left behind, it would be at a disadvantage in terms of corporate fund raising for investment in plant and equipment compared with foreign countries and the situation could have a negative effect on employment. It is imperative that domestic stock exchanges join hands to enhance international competitiveness.

Recently, NYSE Euronext, which operates the New York Stock Exchange, and Deutsche Boerse announced they had entered merger talks. The London Stock Exchange is also seeking integration with Canada's TMX Group Inc., which operates a Toronto-based stock exchange.

Behind the surge of reorganization centering on European and American stock markets is the rise of the proprietary trading system (PTS) in response to deregulation and improving computer technology. PTS, which can handle rapid trading with low handling fees, is quickly growing by taking big investors and other clients from stock exchanges.

Major stock exchanges such as NYSE are no longer able to make a profit from regular spot stock trading and are shifting to derivatives such as futures and options and relying on settlements of trading of financial products to survive.

In Japan, the situation is not so serious. Existing exchanges are still profitable and hold a large share of the market. Still, if many stock exchanges continue to operate independently, they could fall behind internationally in derivatives trading, which is expected to grow, and in such new areas as emissions trading of greenhouse gases.

Stock exchanges are becoming a huge information equipment industry in which computer systems play a prominent role. If they are small, it is difficult for them to expand strategic investments.

TSE has an overwhelming presence in domestic spot trading of stocks and bonds. Meanwhile, OSE has been expanding derivatives trading to survive. The merger is needed to strengthen Japan's capital market.

TSE was overtaken by the Shanghai Stock Exchange in terms of value of stock trading. While it may be necessary to advance cooperation with stock exchanges in Asia and other regions that are making remarkable growth, needless to say it is a top priority for domestic stock exchanges to come together.

In addition to TSE and OSE, Japan has stock exchanges in Nagoya, Fukuoka and Sapporo. In those regions, there are strong voices calling for their maintenance to stimulate the local economy. There are also problems that must be settled such as finding jobs for employees. For this reason, reorganization has not moved forward at these exchanges.

However, amid the global trend for integration, changes are needed. Bold steps must be taken to build strong stock exchanges. Otherwise, decline of the Japanese stock market is inevitable.

--The Asahi Shimbun, March 11